There’s been a lot said about Ireland’s money woes of late and with good reason as the situation involves questioning the very future of the Euro as a going concern and the prospects of the continent’s long-term recovery.
I have never indulged in the near-unanimous Peston-bashing that goes on out there in the big, bad world as I have a strong regard for the BBC’s business reporter and thoroughly enjoy his blog but I have to say he has quoted some quite odd numbers in his latest blog.
Which British banks are at risk? Well according to new research by Morgan Stanley, total lending to Ireland’s private and public sectors is equivalent to 92.3% of the net assets of Denmark’s Danske Bank, 89.5% of Royal Bank of Scotland’s net assets, 60.2% of Lloyds’ net assets and 15.9% of Barclays’ net assets. Those figures exclude bank-to-bank lending, but they indicate how exposed Britain’s banks are to Ireland’s woes (RBS is most exposed, as the owner of a substantial Irish bank, Ulster Bank).
Looks worrying doesn’t it, 89.5% of RBS’ assets? No wonder Osborne is ploughing in to help Ireland out, we can’t bring RBS down with the Irish. Why is one of Britain’s banks so heavily linked in with Ireland anyway? Is it something to do with the Six Nations? Well, the key distinction is that this is net assets rather than just plain old assets. That 89.5% only applies to the difference between RBS’ total assets less its total liabilities and, well, after the whirlwind few years that the Bank has had who knows what that number could be.
If RBS has total assets of £300bn and liabilities of £299.9bn, then RBS is exposed to a paltry £89.5m. If liabilities are £100bn then RBS is exposed to £179bn. In other words, that 89.5% really doesn’t tell us anything in the absence of absolute figures which we clearly don’t have available. I suspect mind games are at play here and we’re being coerced into swallowing our medicine. What’s Morgan Stanley’s exposure to Ireland, I wonder?
Of course, some of Britain’s bailout money will presumably go towards the aforementioned Ulster Bank which is 100% owned by RBS. So, if you want to see it that way, this is actually (in part) a British Government bailing out a British company, just doing it on the scenic route via Ireland. (And I hope it went up the West coast, beautiful it is there)
We are not lending to Ireland to help Ireland out, we are lending to Ireland to save our own skin. I would have thought that the Tory backbenchers and Nigel Farage’s of this world would be at the forefront of such an approach since Osborne’s is a Britain-first policy, but it seems they’ve decided otherwise.
Think about it this way, if Ireland was on the other side of the world, if this was New Zealand or Paraguay facing financial meltdown, would Britain altruistically ride to its rescue? Unlikely. ‘Not my problem guv’ we would probably collectively say or ‘no spare change mate’ even, shamefully if so.
The overriding message is that it is the banks that continue to be the drag on the recovery, not to mention the initial problem in all of this. Osborne’s actions in the short term should not be difficult to sell politically as it is self-interest at stake, whatever way you want to look at the Net Assets of the entities involved.
The real political problem for the politicians is the perception that the Banks have collectively got away scot-free with causing so much pain. One solution, to turn RBS into some sort of mutual Green bank, isn’t one that should be looked down on too disdainfully.
#1 by Max on November 18, 2010 - 7:12 pm
We should not bail out Ireland until they come up with a proper long term way out.
We cannot keep throwing good money after bad. Bailouts protect bondholders and shareholders ie well- off people with capital to play with. Anyone who suffers genuine hardship can claim social security same as anyone else who faces a drop in income from eg unemployment. The bondholders and shareholders should lose out because they made bad investment decisions. There should be wide ranging debt forgiveness-ie no more mortgage evictions, and a return to realistic houseprices is inevitable and desirable. This will be difficult but a less bad option because its the holders of capital who lose, not the average person who is typically in debt by necessity of needing a home, and a user of public services. Ireland will default eventually anyway , no more of the extend and pretend.
#2 by Jeff on November 18, 2010 - 9:40 pm
Max, I’m not convinced that bail-outs only help out the shareholders and bondholders, (though they of course won’t be complaining). Mortgage holders, pensioners and savers would see their money drop (or even disappear) overnight if Irish banks were allowed to fall like a pack of dominoes. Not necessarily just Irish people too as the knock-on effect would come to the UK and elsewhere. Bailing out Ireland is the cheapest option for the UK.
There does have to be a way that banks can be allowed to fail such that it is only the investors and shareholders who take the hit. That’s how free markets should operate so I’m with you there. We don’t yet have that structure though so we have to stump up.
#3 by Alasdair on November 19, 2010 - 9:45 am
“We are not lending to Ireland to help Ireland out, we are lending to Ireland to save our own skin. I would have thought that the Tory backbenchers and Nigel Farage’s of this world would be at the forefront of such an approach since Osborne’s is a Britain-first policy, but it seems they’ve decided otherwise.” – why would any Conservative want to bail out private business?
We shouldn’t be bailing out businesses and we certainly shouldn’t be bailing out countries.
#4 by richard on November 20, 2010 - 1:01 am
“I suspect mind games are at play here and we’re being coerced into swallowing our medicine”
Not just us, but Ireland too. I’m no economist, but Ireland insist that no bail-out is needed, and yet it seems they’re being pressurised into taking it.
If I were to be cynical, it looks like all this speculation is designed specifically to weaken Ireland to the point where they have to accept a bail-out. A kind of a self-fulfilling prophecy.
#5 by Max on November 22, 2010 - 7:29 pm
Check out http://www.zerohedge.com/
and find the film with Jim Rogers: “Ireland Should Go Bankrupt”
And the UK and US and Greece too.
Its time to call time. Ireland needs to start afresh with a new economic model, not continue providing life support to zombie banks. The banks should go bust. Start again with a clean sheet. This is likely to happen anyway, why prolong the agony at the expence of public services?
Why should savers and pensioners be protected when basic public services are being cut, when unemployment is rampant . To govern is to choose. Bailouts protect a minority. Public spending helps more people. Individual social security payments are the way to help the needy, not welfare for bust corporations.
#6 by Jeff on November 22, 2010 - 9:08 pm
I don’t know Max, it’s a painful way to teach a company a lesson. Someone somewhere will have worked out that it will collectively cost us more, all things considered, to let a bank and a country go bust than it is to bail them out in the short term and get them back on the straight and narrow, which will be why all main political parties were in favour of the bail-out.
And let’s remember, this isn’t a handout. The UK (and Sweden) will make a pretty penny out of these loans if Ireland draws down on them.